Amazon, Macmillan, Agency Models, and Quality (Oh My)

January 31st, 2010 · 27 Comments
by Kassia Krozser

Be careful what you ask for, because you just might get it.

Consumer expectations will rise if prices do

Over the weekend, we rode a rollercoaster as Macmillan laid out its demands for ebook pricing to Amazon, and Amazon responded by pulling (nearly) all Macmillan titles from its store. Late Sunday, Amazon announced they would “capitulate” to Macmillan’s demands on pricing. It almost goes without saying that this will be the go-forward model for all major publishers, and maybe their independent brethren as well.

Publishers have gotten what they want.

Man, it seems like a victory doesn’t it? In a way it is. I’ve been of two minds on this topic since the entire concept of the “Agency Model” was announced (rough definition below). Setting aside the fact that it’s still opaque to parties with a vested interest (authors, agents, even other retailers), I have a natural aversion to wholesalers (book publishers) forcing prices on retailers (Amazon, et al). I believe price is an important tool in the arsenal of retailers. And, as a consumer, I’m not yet willing to pay more for the vast majority of ebooks being released today. More in a few paragraphs.

On the other hand, I love that this approach (finally) levels the playing field for all retailers. Sort of. Some have argued that this battle is not about DRM, but it is all about DRM. DRM is the tool retailers use to lock in consumers. Amazon does it. Sony does it. Barnes & Noble does it. Apple does it (or rather will, in the case of books). Every retailer who has a device has a proprietary DRM scheme. And publishers encourage this. They demand DRM.

These DRM schemes lock other retailers out of the devices. They allow companies to dominate the marketplace. Why would I shop IndieBound when I can’t load the books on my preferred device? Ah, the battles on the horizon! It’s going to be a bumpy year.

And…there is a lot more elasticity in ebook prices than has been acknowledged or realized. Macmillan is talking about pricing books in a (yet-to-be-revealed) dynamic manner, ranging from $14.99 to $5.99. As Macmillan has not previously been a good actor in ebook pricing, this news is heartening. This seems like an attempt to map the existing print marketplace to the digital marketplace, when now is the time for more creativity and thought when it comes to ebooks, content presentation, and pricing — and yeah, that does mean considering higher prices (I am not contradicting what I said about what I will pay).

Publishers have made bad arguments when it comes to ebook pricing. They confuse in-house value (often based on the price paid for the book) with consumer perception of value. Now these publishers who once hid behind Amazon — seriously, I’ve had publishers blame Amazon for crappy formatting when it was clear the underlying file was the problem — will have to stand behind their product. No. They will have to produce better quality books.

This means both from story and production perspectives. It doesn’t appear publishers will make more money from retailers under the proposed Agency Model, but consumer expectations will rise if prices do. There will not be additional margin — at least not significant additional margin — to play with, but publishers will be held to a higher ebook standard.

In my Publishing Perspectives article last week, I discussed the importance of getting basics right (in a “we couldn’t have done better if we’d coordinated it” moment, at Digital Book World, Liza Daly did a live presentation on this at well). During the skirmish between Amazon and Macmillan, I happened to be reading a Macmillan ebook, and the errors were like speed bumps. I cannot tell you how poor formatting pulls me out of a story (this goes for print as well). Quality is going to make a huge difference if publishers want to convince readers to pay more.

And this quality will be even more critical for books purchased via Apple’s bookstore. The display will not be forgiving of books with poor formatting (nor will the customers who buy the books). This is what publishing has been asking for, they have it, what happens next? And will the Agency Model be enough to cover innovation?

For those wondering, the Agency Model, as reported by Publishers Lunch, is roughly (registration required for link):

Though initially resistant to a new paradigm, by multiple accounts Apple has agreed in principal to do business with publishers under what is called the agency model–as opposed to the wholesaling model currently in place for ebook sales and most physical book sales. In the agency model, the publisher is considered as keeping possession of the actual goods (the ebook files) and it pays a commission to its authorized selling partners. So the publisher sets the retail price of the ebooks, and the commissioned agents have no ability to change that price. Ebooks sold under the agency model would be offered to any established trading partners who agree to the commission and other particulars.

I call this scan based trading, publishing style. Certainly, there is far more to this than described. First off, it hews awfully close to the description of direct sales. Then again, it’s hard to imagine major retailers allowing publishers to “keep possession” of files — publishers simply don’t have the fulfillment channels in place, and shouldn’t. I’m not opposed to publishers selling direct from their websites, but that’s a whole different type of infrastructure.

It’s all a bit fuzzy at this point. Agents are still wondering what this means, which means authors are wondering what this means. More specifically, how this new model maps to their existing (and future) contracts. Mike Shatzkin explores this as well in his post about this story.

So what does all this mean? I imagine the next huge debate will be between agents and publishers as the new model is mapped to real money for the people who write books. Other retailers will be demanding similar terms to Amazon (and perhaps breathing a sigh of relief). Consumers will be sniffing at the new pricing model and voting with their dollars (one doesn’t have to read between the lines of Amazon’s statement to know where the retailer hopes this ends). DRM will remain on the horizon.

Oh, and independent publishers and independent booksellers and individuals will be clamoring for equal treatment.

Fasten your seatbelts…

File Under: Non-Traditional Publishing

27 responses so far ↓

  • April L. Hamilton // Jan 31, 2010 at 8:17 pm

    Hard to sum up (it’s a long post), but major points are:

    1. Macmillan authors earn same royalty whether their Kindle books are priced at $15.99 or $9.99.

    2. Amazon pays Macmillan same amount for Kindle rights to their books (1/2 of hardcover list price) whether Amazon discounts the Kindle books to $9.99 or not—Amazon is taking the loss, not Macmillan.

    3. Higher-priced ebooks will sell fewer copies than lower-priced ones, ultimately reducing authors’ royalties and readership.

    4. End result: authors & consumers lose in the near-term, Macmillan and Amazon in the longterm.

  • April L. Hamilton // Jan 31, 2010 at 8:18 pm

    In the above post, I was referencing a post on my blog when I said “long post”, not this post. I’ve linked to the post on my blog in my username link on this comment.

  • April L. Hamilton // Jan 31, 2010 at 8:56 pm

    Dur, that was about as clear as mud. =’p

    What I meant to say is, when I mentioned the post being “long”, I was referring to my own blog post, not this Booksquare post, and that I’ve linked to my blog post in my username on this (and the above) comment.

  • Kassia Krozser // Jan 31, 2010 at 9:06 pm

    On point two, Amazon will be paying 30% (based on previous reporting) Macmillan. The open question is how (assuming this is not defined as a direct sale) this is accounted for to authors. I’ve seen two scenarios floated; I believe the reason the second is plausible to people with more familiarity with these agreements than I is because of the use of the word “commission” in the initial reporting. In some cases, commissions are deductible prior to calculating royalties. As you can see, it makes a difference.

    The math will be like this: $15 – 4.5 (30%) = $10.50 to publisher. Author royalty calc one: $15 x 25% = $3.75. Author royalty calc two: 10.50 x 25% = 2.63.

    But the details have not yet been revealed (at least to any of the agents I’ve spoken with). My rule of thumb is (always) the party who writes the contract holds the power.

  • April L. Hamilton // Jan 31, 2010 at 9:25 pm

    Interesting, and if I were a Macmillan author, troubling. If your calc #2 turns out to be the correct one, Macmillan authors will be earning even lower royalties than I originally thought.

    I also assume—correct me if I’m wrong—that if Macmillan opts to price its Kindle titles anywhere from $4.99 to $14.99, author royalties on those titles will be variable as well, going down as the list prices go down. =’(

  • Kassia Krozser // Feb 1, 2010 at 12:58 am

    @april — I cannot say about the variable royalties. Honestly, I can speak to standard agreements, but I don’t know (yet) how the agency model will map to those terms. I will say that I am not opposed to the model being implemented, though the details may change my position. The existing print model was not workable for digital. This model makes more sense, at least as a starting point. I have great concerns about how authors play out, but haven’t heard enough to form a strong opinion. Yet.

  • Clifford Fryman // Feb 1, 2010 at 7:26 am

    In October, Macmillan lowered (or at least tried to) author royalties on eBook sales from 25% to 20%. Did they not go through with it or went back to a 25% rate?

    If they are paying some of the lowest eBook royalty rates in the industry, it is even harder to swallow watching them basically strongarm Amazon into selling their eBooks at a higher price.

  • Rich Adin // Feb 1, 2010 at 8:11 am

    @Kassia — There is one error in your article, that is this:
    DRM is the tool retailers use to lock in consumers. Amazon does it. Sony does it. Barnes & Noble does it. Apple does it (or rather will, in the case of books). Every retailer who has a device has a proprietary DRM scheme. And publishers encourage this. They demand DRM.

    The DRMs used by Sony and B&N are not proprietary in the sense that Amazon and Apple’s DRMs are proprietary. Sony and B&N are using a flavor of Adobe’s DRM that is available to any device manufacturer on a nonexclusive basis. Consequently, many, if not most, device manufacturer’s are including the Adobe flavors. You can buy a book at Sony’s bookstore and read it on non-Sony devices.

    In contrast, Amazon’s DRM schemes are both proprietary and exclusive. Amazon, which owns the Mobi flavor, will not permit Mobi to coexist on a device with any other DRM flavor, which is why Mobi is no longer the universal standard. Similarly, Amazon has not released its Kindle-specific DRM schemes, keeping them solely for its own devices. Apple is expected to follow Amazon in this regard.

    I recognize that this is a fight that is distinct from the pricing fight, but to me it is the more important fight and is one reason why I have never considered buying a Kindle. My thought is that there should be a central repository (see my proposal at http://americaneditor.wordpress.com/2010/01/21/a-modest-propo…lishers-part-2/) that is device agnostic. I think publishers could make a better value argument for ebooks if consumers really thought that what they bought today they could read 10 years from now.

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  • Kassia Krozser // Feb 1, 2010 at 10:20 am

    @rich — I agree there are different flavors of proprietary DRM. I included Sony and BN DRM in the list because of Adobe Digital Editions. I am not (as you might know) an ADE fan, and have too much evidence that it stops people from reading the books they’ve purchased. My first lovely experience with ADE resulted in my inability to ever access the books I bought. I haven’t had much success since, and if ADE is required, I skip the purchase. Sony’s DRM, despite recent moves toward openness, means that people haven’t been fully able to read things they purchased in the past (the nightmare scenario), and I have not (yet) heard about anyone successfully porting content to the Nook — though, based on statements from Barnes & Noble, I have very high hopes there.

    Then there’s consumer confusion…a discussion for another day. Your thoughts on a central repository interest me as I’m refining my thinking on the cloud proposals. Right now, I am stuck on “who owns the servers in the cloud”.

  • Kassia Krozser // Feb 1, 2010 at 10:54 am

    @clifford – I used the 25% just for purposes of example, not to tie back to any one publisher. Nobody knows for sure, but the publishers are, Random House excepted, doubling down on this proposed scheme. This is why, while I completely understood author anger at Amazon over the weekend, I was a bit surprised by such strong author support for the publisher. I have a feeling we will be seeing some different sentiment coming from the author quarter in the coming weeks.

    Again, I am not saying the publishers are making a mistake or overtly burning authors. I think digital book economics are different than print book economics, and treating them as the same as print is dangerous (and needlessly expensive). I’ve noted in the past that authors will likely see a decline in certain types of income.

  • Theresa M. Moore // Feb 1, 2010 at 12:59 pm

    So when Amazon raises the royalty rate for publishers of Kindle ebooks to 70%, I understand that MacMillan will benefit from the raise, too. That still does not address the issue of DRM, since many readers do not have devices friendly to Adobe Digital Editions. And it also does not address the issue of the smaller publishers having to stand by and watch the behemoths go at each other. The fact is that both Amazon and MacMillan will lose to the readers, whose expectations are already high, and they alone determine whether a book will sell by price alone. If MacMillan thinks its books are that good they had better prove it, or learn the lesson most of the rest of us have already.

  • Theresa M. Moore // Feb 1, 2010 at 1:00 pm

    Oh, and about the Nook. BN has not even released the device yet. So no way to determine whether it even has a shot at competing with Kindle.

  • Mike // Feb 1, 2010 at 1:12 pm

    In response to some of the comments, authors will be making less from MacMillan because they recently announced that the royalties they will be paying authors for e-book sales will be dropping from 25% to 20%. If agents were smart, they would try to negotiate print rights only, allowing the author to retain the e-book rights. Under Amazon’s new publishing agreement, authors publishing directly with them would be earning 30%, but have the option of earning 70% if the author agrees to cover the delivery rate. But even at that, with a 9.99 price tag, the author would stand to earn between $6.00 and $7.00 per e-book sale, which is almost 3x what they would earn from the publisher.

  • Amber Polo // Feb 1, 2010 at 2:02 pm

    I found it ironic Amazon referred to a monopoly by publishers. Next they will (like Google) claim authors have no monopoly on their own works.

    And yes, authors need agents to help them in this mess.

  • Peter Cooper // Feb 1, 2010 at 3:35 pm

    Oh, and independent publishers and independent booksellers and individuals will be clamoring for equal treatment.

    Some will, but the smart ones won’t. Macmillan’s “win” a great shot in the foot for the big publishers, since smaller publishers and independent authors can significantly undercut them and get a wider range of freedom on price.

    With digital distribution finally opening up to the masses, this shot in the foot could bring the publishers down a peg or two if they don’t rapidly compete with more nimble small presses who will take full advantage of new markets and pricing models.

    Let Macmillan screw themselves over – the rest of us can undercut them and their authors and carve our own, new niches.

  • Literature Crazy // Feb 2, 2010 at 6:00 am

    @Theresa M. Moore

    B&N has released the Nook–it just depends on when you purchased it. Ship date is running approximately 2-3 weeks behind purchase date (it was more like 5-6 weeks). Their advertising of being “sold out” is kind of misleading; they’re not “sold out” (because that would be technically impossible) since they’re doing a manufacture-on-demand model of sorts.

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  • Daithi // Feb 5, 2010 at 6:18 pm

    I have to say that I am completely perplexed my media’s reactions to this story. Macmillan wants 70% of $15 when they were getting 50% of the cover price (typically around $28). Is $10.50 more than $14 in the bizzaro world of publishing? The authors get less money too. Macmillan pays 20% of net, and I’m pretty sure 20% of $10.50 is less than 20% of $14. AND the customer has to pay 50% more. This is utterly bizzare.

    BTW, Amazon does not require DRM. The publishers have the ability to determine whether or not DRM is included on a book.

  • Rich Adin // Feb 8, 2010 at 8:31 am

    Kassia, I have started a Hall of Shame at my blog (www.americaneditor.wordpress.com) where readers can let others know about books — print and ebooks — with editing and formatting problems.

  • Gale Laure // Feb 13, 2010 at 12:38 pm

    As an author who is selling both hardcopy books (trade paperback) and ebooks (Kindle & many other forms) of my work via the Internet booksellers and Bookstores, I have only a few concerns. First I must always own my copyright and second I must make as much in royalties as I can. I leave the nuts and bolts of selling to the booksellers and publishers. As far as setting the price – I believe the publisher should perform market research and set the MSRP accordingly. The bookseller can sell the book for as much or as little as they wish. The bookseller should keep in mind their own profit margin.

    GL

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  • Anonymous // Sep 20, 2012 at 6:56 am

    Indeed price matters. I agree with you that if the price is high the readers will have high expectations on the quality of the books.